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Thatcher Again?

The only certainty about Sunday’s German election is that it will likely bring to power the country’s first female leader. Angela Merkel, a physicist-turned-politician, will replace Gerhard Schroeder as chancellor. Dubbed the “German Thatcher” as much for her scientific background and no-nonsense personality as for her reformist economic policies, Merkel’s expected electoral achievement is unprecedented.

Yet, the question remains: Is the probable new chancellor a centrist sheep in Thatcherite clothing or is she the real thing? Despite growing evidence that the German welfare state is incompatible with high rates of economic growth and rising living standards, German political elites continue to proclaim their commitment to the “soziale Marktwirtschaft” (the social market economy), and explicitly reject an American-style market economy. For most German politicians, that is a successful electoral strategy; but it is not a winning strategy for Germany’s economic future.

The truth is that Germany has recently grown poorer relative to other members of the European Union. Between 1995 and 2003, average annual economic growth in the EU’s 15 longstanding member countries was just 2.6 percent. In contrast, the rapidly liberalizing economies of the EU’s eight new Central and Eastern European members grew at an average rate of 4.6 percent per year during the same period.

Impressively, the EU’s “New Eight” saw their per capita incomes (adjusted for purchasing power) rise by 44 percent between 1995 and 2003. Estonia, the star performer, saw her income rise by 78 percent during the same period. This performance dwarfed Germany’s, which grew a mere 1 percent per year.

Therefore, it is highly misleading for German politicians to claim that an expensive welfare state is necessary in order to “protect” high German living standards, since one’s standard of living is a relative, not an absolute, measure of well-being. As other countries speed ahead, Germany risks being left behind, unless the country undergoes deep structural reforms.

What are the chances of that happening? The nature of a Merkel-led government heavily depends upon the coalition of parties that will form the new government. For months, opinion polls forecast a comfortable majority of parliamentary seats for a coalition of Merkel’s Christian Democrats and the free-market Free Democrats.

During the course of the campaign, however, polls indicated that the likelihood of such a governing alliance was dwindling. In that event, a so-called “Grand Coalition” between the Christian Democrats and the Social Democrats is expected. If Merkel is forced to lead such a consensus-driven government, any chance of Margaret Thatcher’s spirit inhabiting Berlin’s corridors of power will be laid to rest.

Schroeder’s Social Democrats headed a two-term government (in a coalition with the Greens) that produced high budget deficits and stubbornly high levels of unemployment. Social Democrats remain internally torn over the pace, and even the desirability, of economic reform.

Christian Democrats, meanwhile, don’t have the ideological backbone to prevail in such a contest. Campaign promises to freeze spending and to cut back on subsidies will go nowhere in a Grand Coalition.

However, if Merkel’s party is paired with the Free Democrats, greater economic reform will be possible, if not probable. Although not as libertarian-minded as they were a generation ago, Free Democrats remain the only German party explicitly committed to tax and spending cuts in tandem with the deregulation of the country’s job-destroying labor laws.

During the campaign, Merkel’s Thatcherite credentials were boosted when she named tax expert Paul Kirchof as her party’s finance spokesman and, hence, Merkel’s likely choice as finance minister. Kirchof strongly supports a flat tax on income. Nevertheless, given the Christian Democrats’ preference for piecemeal tax cuts rather than radical tax reform, the flat tax’s future probably rests upon the Free Democrats’ ability and willingness to stiffen the new government’s economic spine.

Germans want a change of government but are ambivalent about the direction the new government should take. Margaret Thatcher might suggest Merkel’s responsibility is to have the courage of her apparent convictions and confidently lead Germany along a freer and more prosperous path.